A Borrower's Rights to Waiver an Escrow Account

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PMI is another requirement when you put less than 20 percent down.
PMI is another requirement when you put less than 20 percent down. (Image: Creatas/Creatas/Getty Images)

Money held in escrow ensures the funds remain protected by a third party in a loan transaction. Escrow is commonplace in regards to home loans, and the third party must act on instructions provided by the lender and borrower; the instructions usually pertain to payment of property taxes and insurance. Although escrow can be an effective way to ensure these payments, some borrowers may prefer to waive escrow and manage the money themselves.

Why Lenders Like Escrow

While lenders enjoy collecting interest on monies deposited in borrowers' escrow accounts, the biggest benefit is the reduction of risk. Should the borrower default on his mortgage payment -- and on his property tax and insurance payments, by extension -- having funds deposited in advance significantly lowers any financial risk on part of the lender. Property taxes are priority liens and are paid first in foreclosure, even before the first mortgage; as a result, a buyer who has less equity must put money in escrow in advance.

Avoiding the Escrow Requirement

A borrower who puts down more than 20 percent on a home loan purchase has the right to request a waiver of escrow, according to "Mortgage Professor" Jack Guttentag. Although a borrower has the right to waive escrow under these circumstances, the lender has the right to ask the borrower to pay a fee, which ranges from 1/4 to 3/8 of a point -- a point is typically a monthly mortgage payment. Some states don't permit escrow waiver fees; however, that means that lenders in those states may be less likely to grant an escrow waiver.

How to Make an Escrow Waiver Pay Off

The key to making an escrow waiver work for you is to take the money that you would otherwise put into escrow and invest it. This approach has its risks; borrowers must realize that any investment can go to zero, and quite suddenly. They should also realize that many escrow accounts earn interest for the borrower. However, in a safe, guaranteed investment such as bonds, the homeowner can reduce his net payout for property taxes and insurance. Investment returns are also frequently subject to income taxes.

Facts About Escrow

When a borrower applies for a home loan and has to pay into escrow because he is putting less than 20 percent down, he must deposit no more than two months' tax and insurance expenses as guaranteed by federal law. Not only will this provide a cushion in the event of a default on payments, the funds will also apply to taxes and insurance increases, which are usually inevitably. If you are putting less than 20 percent down and don't have the right to waive escrow, then consider the benefit that paying your taxes and insurance over 12 months makes these typically expensive payments more manageable. As a result, after a while, you may forget you're making them.

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